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California Online Sales Tax Faces Enforcement Hurdle

Sep 14, 2012
Originally published on September 14, 2012 11:43 am

It's not hard to find online shoppers these days. Take the hipster cafe in San Francisco's Mission District where Shirin Oskooi opens her laptop and ticks off her latest Amazon purchases.

Next to her is Craig Sumner. He opens an Amazon invoice to see how much sales tax he was charged on his latest pair of Levis: none.

That changes Saturday, when a new law passed by the cash-strapped state goes into effect. Every out-of-state business that sells more than $1 million in merchandise to California customers will be required to collect sales tax and ship it back to state coffers. Before, that was only true of companies with a store in the state, like Target or Wal-Mart.

The Web shopping behemoth Amazon lobbied hard against collecting tax, arguing it wasn't its responsibility because it didn't have a store in California. Local mom-and-pop businesses countered that by not charging the tax, the corporate giant had an unfair advantage.

"I think it's capitalism at its best. I think it's the market just shifting," says Jerome Horton, who chairs the state tax agency.

Horton estimates that California is losing $1.2 billion a year in unreported sales tax. He expects the new collection effort will recoup about a quarter of that.

He's hiring a small army of new collectors and auditors to target companies that don't comply.

"They're going to test our will to enforce the law," Horton says. "We're not talking about folks who make mistakes. We're talking about people who intentionally don't pay their fair share. Not a penny. Zero. Nothing!"

Under the new law, it doesn't matter if an out-of-state retailer has a brick-and-mortar store in California. But — and here's the important caveat — Horton says they must have local contractors who bring in at least $10,000 in sales.

"And so what many of the companies have done is that they chose to shut down their affiliates here in California," he says.

That's exactly what another mega e-tailer, Overstock.com, is doing. President Jonathan Johnson says he's terminating contracts with hundreds of California affiliates to comply with the law.

"Overstock.com will always be a good corporate citizen, and we will collect tax any place where we have a physical presence as long as that's the law of the land. California's attempts to expand that law aren't constitutional," Johnson says.

The main winners, at least for the moment, may be small online retailers who don't sell enough in California to collect the tax, like Silver Gallery in Waynesboro, Va. Last year it sold about $300,000 in silver frames, and flutes and trinkets to California.

Still, owner Stacey Strawn fears it's just a matter of time before she'll have to collect, given that Amazon caved and that similar proposals are popping up in other states, and even in Congress.

"As bills like this begin to pass — and I hope they don't — businesses my size are probably going to give up, and you're going to have a lot less choice for your Internet shopping," says Strawn.

Back at the cafe in San Francisco, another frequent Amazon shopper, Susan Landau, says it's not just about price. She plans to keep shopping online.

"It's still more convenient to shop online than to go to the store, so sales tax isn't something that I worry about all that much," Landau says. "I think it's fine."

Copyright 2012 KQED Public Broadcasting. To see more, visit http://www.kqed.org.

Transcript

STEVE INSKEEP, HOST:

Attention California shoppers, starting tomorrow, you begin paying sales tax on a wider number of online purchases. It is the eighth state to pass a so-called Amazon tax, named after the mega e-tailer.

As KQED's Aarti Shahani reports, it is the big online retailers who are the main target.

AARTI SHAHANI, BYLINE: It's not hard to find online shoppers these days. Take this hipster cafe in San Francisco's Mission district where Shirin Oskooi opens her laptop and ticks off her latest Amazon purchases.

SHIRIN OSKOOI: A watch I bought, oh a bunch of stuff for Burning Man, like glow-in-the-dark shoelaces. A bunch of different kinds of tonic water. I got a blender, a bike lock...

SHAHANI: Next to her is Craig Sumner. He opens an Amazon invoice just to see how much sales tax he was charged on his last pair of Levis.

CRAIG SUMNER: Sales tax zero. So it looks like, you know, in this one example it was not, I think, on Amazon typically, there's not.

SHAHANI: That changes at midnight, when a new law passed by the cash-strapped state goes into effect. Every out-of-state business that sells over a million dollars to California customers will now be required to collect sales tax and ship it back to state coffers. Before that was only true of companies with a store in the state - like Target or Wal-Mart.

The web shopping behemoth Amazon lobbied hard against collecting this tax, arguing it wasn't its responsibility because it didn't have a store in California. Local mom and pop businesses countered that by not charging the tax, the corporate giant had an unfair advantage.

JEROME HORTON: I think it's capitalism at its best. I think it's the market just shifting.

SHAHANI: That's Jerome Horton, who chairs the state tax agency. He estimates California is losing $1.2 billion a year in unreported sales tax. Horton expects the new collection effort will recoup about a quarter of that. He's hiring a small army of new collectors and auditors to target companies that don't comply.

HORTON: They're going to test our will to enforce the law. We're not talking about folks who make mistakes. We're talking about people who intentionally don't pay their fair share, not a penny, zero...

(LAUGHTER)

HORTON: ...nothing.

SHAHANI: Under the new law, it doesn't matter if an out-of-state retailer has a brick and mortar store in California. But, and here's the important caveat, Horton says they must have local contractors who bring in at least $10,000 in sales.

HORTON: And so what many of the companies have done is that they've chose to shut down their affiliates here in California.

SHAHANI: That's exactly what another mega e-tailer, Overstock.com, is doing. President Jonathan Johnson says to comply with the law; he's terminating contracts with hundreds of California affiliates.

JONATHAN JOHNSON: Overstock.com will always be a good corporate citizen, and we will collect tax any place where we have a physical presence as long as that's the law of the land. California's attempts to expand that law aren't constitutional.

SHAHANI: The main winners, at least for the moment, may be small online retailers who don't sell enough in California to collect the tax, like Silver Gallery in Waynesboro, Virginia. Last year, they sold about $300,000 in silver frames and flutes and trinkets to California.

Still, owner Stacey Strawn fears it's just a matter of time before she'll have to collect, given that Amazon caved and similar proposals are popping up in other states, and even the U.S. Congress.

STACEY STRAWN: As bills like this begin to pass, and I hope they don't, businesses my size are probably going to give up and you're going to have a lot less choice for your Internet shopping.

SHAHANI: Back at the cafe in San Francisco, another frequent Amazon shopper, Susan Landau, says it's not just about price.

SUSAN LANDAU: It's still more convenient to shop online than to go to the store, so the sales tax isn't something that I worry about all that much. I think it's fine.

SHAHANI: Landau plans to keep shopping online.

For NPR News, I'm Aarti Shahani in San Francisco. Transcript provided by NPR, Copyright National Public Radio.